Water treatment projects in Canada are now considered a lucrative and, above all, sustainable investment for insurers. Explain how the industry can benefit from this Thomas Flury and Zanczan Dalmis.
With over 40 thousand water treatment plants in Ontario, the Canadian province is one of the largest demand for innovative and sustainable water treatment. There is a strong mix of private providers with government buyers. In Canada, a water company can be privately owned and still managed by the state water purifier. The financing, on the other hand, is often of a private sector nature. Renewal measures have been required by law since the Clean Water Act 2004 and many investments were postponed or used differently after the financial crisis.
As a result, the regulatory changes and environmental protection amendments should be implemented next year, but will be massively delayed. This creates an opportunity for investors to finance the renovations together with implicit government support. Veolia, Jacobs and other providers have positioned and established themselves accordingly in recent years.
Canada has a constitutional structure similar to that of Germany. There are no direct guarantees, but in reality municipalities do not go bankrupt and budgets can only be negotiated at the municipality level if the province takes responsibility for it. The Municipial Responsibility Agreement (MRA) exists specifically in the water sector, which allows the state to step in if there are operational or financial problems. Europe is organized differently in this particular area.
Legally anchored PPP projects (public-private projects) are difficult to implement and as individual countries or companies such as in Italy in the solar sector and Abengoa from Spain show, in an emergency the private is left to fend for himself. This different structure of the financing structure, together with the privatization that has been established for decades, has resulted in a sharp increase in market activity in North America. Water treatment projects are traded, bundled, sold and thus a securities activity is created through so-called income trusts or similar listed values. As early as the 1980s, this resulted in increased direct investment activity by institutional investors. This fact explicitly ensures better exit scenarios for supposedly illiquid projects than in the European market.
Due to its experience in combination with the regulatory and political demand, Signina Capital sees a massive expansion of the portfolio formation of medium-sized projects in the water treatment area. The demand for $ 2 million to $ 20 million in project finance has grown exponentially, mainly in the profitable capacity expansion area (not greenfield projects). But the financing side of banks and major investors is practically non-existent.
This leads to an arbitrage opportunity between achieving a return of over five percent without leverage with the same political security, while the projects are correspondingly less complex due to their lack of size.The growth in this area is supported by BOAML (Bank of America Merrill Lynch) in their water primer at over nine percent, while the financing in this area makes up less than one percent of the available project financing.
Authors: Thomas Flury and Öczan Dalmis
You can read the full article in the new January issue of Insurance industry.
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